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HC 151-IPublished on 5 April 2005by authority of the House of CommonsLondon: The Stationery Office LimitedHouse of CommonsTrade and Industry CommitteeThe UK AerospaceIndustryFifteenth Report of Session 2004–05Report, together with formal minutesOrdered by The House of Commonsto be printed 22 March 2005

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The Trade and Industry CommitteeThe Trade and Industry Committee is appointed by the House of Commons toexamine the expenditure, administration, and policy of the Department of Tradeand Industry.Current membershipMr Martin O’Neill MP (Labour, Ochil) (Chairman)Mr Roger Berry MP (Labour, Kingswood)Richard Burden MP (Labour, Birmingham Northfield)Mr Michael Clapham MP (Labour, Barnsley West and Penistone)Mr Jonathan Djanogly MP (Conservative, Huntingdon)Mr Nigel Evans MP (Conservative, Ribble Valley)Mr Lindsay Hoyle MP (Labour, Chorley)Miss Julie Kirkbride MP (Conservative, Bromsgrove)Judy Mallaber MP (Labour, Amber Valley)Linda Perham MP (Labour, Ilford North)Sir Robert Smith MP (Liberal Democrat, West Aberdeenshire and Kincardine)PowersThe committee is one of the departmental select committees, the powers ofwhich are set out in House of Commons Standing Orders, principally in SO No152. These are available on the Internet via www.parliament.uk.PublicationsThe Reports and evidence of the Committee are published by The StationeryOffice by Order of the House. All publications of the Committee (including pressnotices) are on the Internet at www.parliament.uk/t&icom.Committee staffThe current staff of the Committee is Elizabeth Flood (Clerk), David Lees (SecondClerk), Philip Larkin (Committee Specialist), Grahame Allen (Inquiry Manager),Clare Genis (Committee Assistant) and Joanne Larcombe (Secretary).ContactsAll correspondence should be addressed to the Clerks of the Trade and IndustryCommittee, House of Commons, 7 Millbank, London SW1P 3JA. The telephonenumber for general enquiries is 020 7219 5777; the Committee’s email address istradeindcom@parliament.uk.FootnotesIn the footnotes of this Report, references to oral evidence are indicated by ‘Q’followed by the question number. References to written evidence are indicatedin the form ‘Appendix’ followed by the Appendix number.

1

ContentsReportPage

Summary 3

1

Introduction 5

2

The UK aerospace industry (UKAI) 6

Contribution to GDP 8

Contribution to UK Trade 9

Employment 9

Productivity 9

International comparisons of productivity 10

R&D and technology spill-overs 11

Regional Impact 11

Foreign Direct Investment 12

Major UK aerospace companies 13

BAE Systems (BAE) 13

Rolls-Royce plc 15

Bombardier Aerospace 16

Smiths Group 17

3

The UK aerospace industry’s current performance 18

Civil aerospace 18

Defence aerospace 19

Market access 19

Emerging international competitors 21

Investment in R&D 22

Government funding of R&D 24

Repayable launch investment (RLI) 26

International comparisons of public support for aerospace 28

4

The dispute before the World Trade Organisation 30

The 1992 EC/US Agreement on Trade in Large Civil Aircraft 30

The current dispute 30

5

Aerospace Innovation and Growth Team (AeIGT) 32

Background 32

Research and technology (R&T) 33

National Aerospace Technology Strategy (NATS) 33

Aerospace Innovation Networks (AINs) 34

Aerospace Technology Validation Programmes (ATVPs) 35

Funding the NATS 36

Process Excellence 37

Skills and People Management 39

Safety, Security and Environment 39

Socio-Economic Environment 40

2 Optional header

Conclusions and recommendations 42

Glossary 44

Formal minutes 45

Witnesses 46

List of written evidence 46

3

SummaryDespite the downturn in civil passenger travel that followed the events of 11 September2001, continued uncertainty in the Middle East and the SARS crisis in Asia, the UKaerospace industry (UKAI) remains one of the most successful sectors of UKmanufacturing. In 2003, the UKAI accounted for 0.6 percent of UK gross value added(GVA) and four percent of value added by the UK’s manufacturing industry as a whole.The UKAI is also one of the UK’s major export sectors, generating a trade surplus of justover £2.5 billion in 2003, compared with manufacturing overall, which had a trade deficit.The UKAI provides direct and indirect employment in the UK for around 255,000 people.Although productivity levels in the UKAI are generally higher than the UK average, theyremain disappointing when compared to the industry’s main international competitors.However, there are signs that UKAI productivity growth is beginning to outpace thesecompetitors. We also found evidence to suggest that there will be a further challenge forthe UKAI as competition from emerging economies is growing. Given the choice,aerospace companies tend to invest where the conditions are most favourable and, inparticular, where they can work in partnership with government-funded R&D.Subcontracting abroad by aerospace companies is increasing as a result of lower costs ormore favourable incentives, such as public R&D investment.The UKAI itself invests heavily in R&D, and is second only to pharmaceuticals in its R&Dintensity. UKAI companies invest more in R&D than their international competitors. Ofthe top aerospace companies in 2003, four UKAI companies, Rolls-Royce, Cobham,Smiths and BAE Systems (which was ranked second behind only Finmeccanica of Italy)appeared in the top twenty in terms of R&D intensity.UK Government support for UKAI R&D has fallen over the last few years. The recent re-organisation of DTI funding programmes has opened new opportunities for aerospaceR&D funding through the DTI’s Technology Programmes. Aerospace companies can alsobenefit from R&D tax credits and repayable launch investment. There is, as yet, littleevidence of whether the new funding streams will compensate the UKAI for the loss ofprevious support programmes. However, evidence from the latest round of TechnologyProgramme funding, where the aerospace industry received a quarter of the £60 milliondistributed, suggests to us that they might.The work of the Aerospace Innovation and Growth Team (AeIGT) is a prime example ofwhat can be achieved for an industry through the willing collaboration of its stakeholders.The UKAI is one of the most important sectors of the UK economy and we believe that,through their support for the AeIGT, this has been recognised by Government. With atarget date for the implementation of the recommendations of the AeIGT’s Report on thefuture of the UKAI of 2022, we believe it will be some time before a meaningful assessmentof progress can be made with any degree of confidence. However, the progress which hasbeen reported to us suggests that a good start has already been made.

5

1 Introduction1. The UK aerospace industry (UKAI) is one of the most successful sectors of UKmanufacturing. Its importance and achievements can be illustrated as follows:— In 2003, the UKAI had a turnover of just over £17 billion and captured ten percent ofthe world market for aerospace products;— The UKAI accounted for just over four percent of UK manufactured output anddirectly contributed just over £5.5 billion to UK gross value added (GVA)1in 2002, asimilar level to the pharmaceutical industry;— There has been a consistently positive aerospace trade balance in the past two decades.In 2003 it was £2.6 billion (close to its long run average of £2.8 billion);— In 2003, the UKAI directly employed just under 122,000 people, 0.4 percent of total UKemployment, and three percent of total manufacturing employment. An additional150,000 people have been estimated to be indirectly employed by the industry;— UKAI productivity was £54,000 per head in 2001, 50 percent higher than the UKaverage and 35 percent higher than for manufacturing as a whole; and— The aerospace industry invested just over £2 billion in UK R&D in 2003, second only tothe pharmaceutical sector. Three aerospace companies featured among the top ten UKR&D investors.2

2. 2002 and 2003 were difficult years for the UKAI. Turnover relating to civil projects wasespecially low as the full impact of lower civilian passenger travel, due to the globaleconomic slowdown and the events of 11 September 2001 in the US, were felt. The mainissues of concern for the UKAI are: the economic ‘health’ of the industry; its futurecompetitiveness; and the implications for government aid to the industry following thelatest WTO dispute between the US (Boeing) and the EU (Airbus). These concernsprompted our inquiry.3. During the course of our inquiry, we took formal evidence from: the Society of BritishAerospace Companies (SBAC), Airbus UK, the trade union Amicus, QinetiQ (the formerDefence Agency Research Agency, post privatisation), the Aerospace Technology SteeringGroup (ATSG), the Department of Trade and Industry and Boeing. We received ninewritten memoranda from other businesses and organisations, which are reproduced in theAppendices. We also received a letter from Smiths Group plc in support of the writtenevidence submitted by the SBAC, which has not been printed.

2 The UK aerospace industry (UKAI)4. International comparisons of turnover in aerospace industries are difficult to measureaccurately, due to difficulties in defining the boundaries of the industry, exchange rates andassigning turnover to nations in such an international sector.3However, our witnessesgenerally agreed that in terms of value added the UK had the second largest aerospaceindustry in the world, after the US (table 1).4

5. The US aerospace industry is by far the largest, driven mainly by the size of its domesticmarket (half of all the world’s civil air traffic being conducted inside the US) with sales in2003 four times those of the UK industry (table 2). The US industry also has greatereconomies of scale, more R&D and the advantage that aircraft are traded in US dollars.5

Table 2 (below) indicates the size of some of the national industries.6. The two main European aerospace industries (in the UK and France) are of roughlysimilar size in terms of turnover. Outside Europe and the US, the largest industry is that ofCanada, which had around half the turnover of the UK in 2003. Some emergingeconomies, such as Taiwan, Indonesia and Brazil, have established their own ‘indigenous’aerospace industries, which, once fully developed, will have an impact on the internationalmarket. The present status of the Russian aerospace industry is unclear and Russian civilaerospace products have yet to make an impact on world markets. It is possible that it willeventually become a significant player in partnership with western firms.6

7. The SBAC told us that the UKAI is one of the most significant sectors in the UKeconomy, comprising 2,500-3,000 companies, and adding: “high value in economic,technological and social returns both nationally, and across the regions”.7Table 3 (above)shows the size of UKAI companies relative to companies elsewhere in terms of aerospaceturnover in 2003.8. The considerable economies of scale available to the aerospace industry and the ever-increasing cost of developing new aircraft and engines, have encouraged greater

7Appendix 14, para 18

international collaboration and fewer ‘prime manufacturers’ of complete airframes orengines.8There are currently two ‘prime’ manufacturers of large civil aircraft: oneAmerican (Boeing) and one European (Airbus) with British participation. There are threeprime manufacturers of civil aero-engines: two American (General Electric and Pratt &Whitney) and one British (Rolls-Royce), all of which manufacture both civil and militaryengines. There are also a number of manufacturers of airframes and engines for smallerregional aircraft.9Each prime manufacturer obtains components from many different partsof the world, and all have collaborative arrangements with firms in other countries.10

9. In the UK, and elsewhere, there is considerable interdependence between the militaryand civil sides of the aerospace industry. Not only do the major UKAI companies producefor both markets, but much of the technology is common to both. For example, accordingto Rolls-Royce, military aero-engines have requirements different from civil ones only inrespect of detectability.11There are many examples both of technology being transferredfrom civil to defence uses and vice versa.12The civil proportion of total UK aerospaceturnover rose steadily up to 1991, from 25% in 1980 to 45% in 1991.13Since 1991, theproportion of UKAI turnover represented by the defence (50% of turnover in 2003) andcivil (50%) sides of the aerospace industry has remained: “relatively well-balanced”,14

suggesting that defence work has sometimes filled the production gaps caused by a declinein civil aerospace demand, and vice versa.10. The UKAI can be broken down into five sectors: aircraft systems and frames (46% of2003 turnover); aircraft equipment (25%); aircraft engines (22%); missiles (5%); and space(2%).15We have not examined the space and missile sectors, since we did not believe wecould do justice to them the time available and have concentrated on the aircraftproduction segment, which represented 93 percent of turnover in 2003.16The UK’s civilspace activities have also recently been scrutinised in detail by the Committee of PublicAccounts.17

Contribution to GDP11. In 2003, UKAI turnover for UK-based aerospace activity stood at £17 billion and itscontribution to UK gross value added (GVA) was just under £6 billion. This wasapproximately 0.6 percent of UK GVA and four percent of value added by the UK’s

manufacturing industry as a whole.18However, the SBAC told us that the direct economicactivity of the UKAI was also supported by an additional indirect contribution of 0.7percent of GVA from the industries’ supply chain, raising its overall contribution to 1.2percent of UK GVA.19

Contribution to UK Trade12. The UKAI is one of the UK’s major export sectors and is a “significant earner of foreignexchange for the UK”,20generating a trade surplus of just over £2.5 billion in 2003.21TheUKAI generated exports of an average £100,000 per employee between 1999 and 2003.This compared to an average in UK manufacturing overall of £42,000 per head in 2001.During the same period, the UKAI contributed an average of £17,000 per employee perannum to the UK trade balance, compared with manufacturing overall, which had a tradedeficit of an average £9,000 per employee per annum. UKAI’s aerospace exports haveincreased their share of world markets from 6.5 percent in 1992 to ten percent in 2001.22

Employment13. Employment in the UKAI has increased steadily from around 99,000 in 1995 to122,000 in 2003, 0.4 percent of total UK employment, and three percent of total UKmanufacturing employment.23The SBAC told us there are also an estimated 134,000employees elsewhere in the UK which are supported in the supply chain to the UKAI,giving a total of both direct and indirect employment in the wider supply chain of just over255,000.24The UKAI is the largest aerospace industry in Europe, accounting for just over30 percent of direct EU aerospace industry employment.25The UKAI is also active outsidethe UK; the Aerospace Innovation and Growth Team (AeIGT) have estimated that forevery two people employed by UK aerospace companies in the UK, another person isemployed by those companies overseas.26

Productivity14. Productivity, as measured by the value added per head, in the UKAI has generallyimproved in real terms since 1992.27In 2001, productivity in the UKAI (£54,000 per head)was 50 percent higher than the UK average (£36,000 per head) and 35 percent higher than

18Appendix 14, para 1.2.119Ibid.20Q 19121Appendix 1822Appendix 14, para 1.3.123Source: OECD STAN database, SBAC survey statistics suggest that UK aerospace employment was around 147,000 at theend of 2001 and was reduced to 117,000 at end 2002 as a result of 9/11, before recovering to 122,000 at end 2003.24Appendix 14, para 1.1.125Q 426Appendix 927Ibid.10

the manufacturing average (£40,000 per head).28The SBAC told us the UKAI featuresstrongly in regions such as Northern Ireland, the North West and South West Englandwhere productivity was ten to 20 percent below the national average. They believed thatwithout the contribution of the UKAI to productivity in these regions, the differentialwould be ‘significantly’ worse.29

International comparisons of productivity15. There is no reliable and consistent series of figures for the productivity of the differentnational aerospace industries, which would make international comparisons possible. DrSally Howes, Director General of the SBAC, told us that such comparisons were:“extremely difficult to make”.30Further: “with both our colleagues in DTI and acrossindustry we do recognise that there are some weaknesses in trying to get comparableinformation”.31With this in mind, we asked the DTI if they could provide us with their‘best-available’ estimates of productivity in the aerospace industries of the UK’s maincompetitors. The estimates they provided are given in table 4:Table 4: Labour productivity in aerospace industries, 1991 to 2001Converted from domestic currencies using Purchasing Power Parities (000s)Canada US France Italy Germany UK Japan Spain1991 52 61 29 43 42 48 40 491992 60 61 36 40 44 43 41 521993 67 64 30 41 37 45 45 601994 71 65 45 47 37 55 43 551995 85 66 65 45 35 51 50 521996 83 72 43 42 45 50 52 581997 94 74 87 49 58 61 56 621998 79 75 82 70 67 60 66 641999 95 88 89 69 78 64 58 632000 110 92 93 94 71 70 52 672001 125 106 110 99 83 80 70 54Labour productivity levels in 2001 (UK=100)158 133 138 124 104 100 88 68Annual average growth rate 1990/92 to 20013.2 2.1 1.4 0.1 5.9 4.7 4.8 -0.3Source:Appendix 10 - Derived by DTI from OECD STAN Database and Groningen Growth and Development Centre,60-industryDatabase, October 2004.Notes:Data should be interpreted as indicating broad orders of magnitude of differences across countries and over time as data takendirect from national surveys can give a quite different picture;there may well be legitimate reasons for at least some of thesedifferences.For example,estimates for France in 2001 vary from 92 to 110 depending on source chosen.Aerospace is defined asInternational Standard Industrial Classification heading 353.Labour productivity is defined as GVAper worker employed in that sector.Rates of growth in productivity are sensitive to base year chosen which is why productivity levels have been averaged for 1990 to1992.

16. Within the limits of the available data, table 4 shows that in 2001 the UK was rankedsixth out of the eight aerospace industries shown, in terms of productivity. The UKAI was

28Appendix 14, para 2.2.129Ibid., para 1.5.430Q 231Ibid.11

58 percent less productive than the highest ranked aerospace industry, Canada. However,table 4 also shows that, over the period, the UKAI was ranked third in terms of averageproductivity growth, behind the leader Germany and only just behind Japan. This suggeststhat, should this trend continue in the long-term, the UKAI will eventually ‘catch’ and passits main competitors in terms of productivity levels.32

R&D and technology spill-overs17. The UKAI invested just over £2 billion in R&D in 2003, 12 percent of UKAI turnoverand an annual increase of 18 percent over 2002. Three aerospace companies featuredamong the top-ten UK R&D investors: BAE Systems (ranked No. 3), Airbus (ranked No. 7)and Rolls-Royce (ranked No.10), investing £1.4 billion between them.33The currentsituation in UKAI R&D is looked at in more detail in the next section of this Report.34

18. Aerospace is a high-technology manufacturing industry which provides high valuegoods and services to a wide range of markets.35Many of the technologies, methods andprocesses researched and developed by the UKAI are now being employed in a wide rangeof other UK business sectors. Examples of spin-offs originating from the UKAI include thedesign of racing cars, wind turbines, oil rigs and bridges.36Other examples of technologytransfer within companies include: “power management systems, composites andcomputer chip technology transferred from aerospace to telecoms, medical and otherindustrial applications”.37Airbus told us that the benefits of these technology spill-overs arelikely to be large, as economic studies had provided evidence of significant social returnsfrom this type of R&D. They cited a recent DTI study,38which reported that social rates ofreturn to R&D were considerably in excess of private rates of return. Typically, privaterates of return were in the region of 25 percent (range 9% to 43%), with correspondingsocial rates of return from spill-overs of at least 50 percent (range of 10% to 160%).39

Regional Impact19. The UKAI is important to the economies of, and employment in, many of the UK’sregions. The SBAC told us that ten regional authorities had audited the economicimportance of aerospace and had identified it as a priority industry for generatingeconomic growth. These included: the devolved administrations in Northern Ireland,Scotland, and Wales; and the North West, North East, East Midlands, West Midlands,South East, South West, and East of England Regional Development Agencies (RDAs).

32One vision of the AeIGT Report; An Independent Report on the Future of the UK Aerospace Industry, published in June2003, was that by 2022 productivity in the UKAI must exceed that of the US, France and Germany for the UKAI toremain competitive. For this to happen the UKAI would have to grow at a faster rate than our competitors, assuggested by the figures in Table 4.33DTI, The 2004 R&D Scoreboard, October 2004, page 3034See page 1835Appendix 14, para 1.4.136Q 11537Appendix 14, para 1.4.138See: DTI, Prosperity for All, September 2003, p2839Appendix 2, para 2.712

Each of these areas had supported the establishment of a regional aerospace tradeassociation to: “help accelerate the growth of aerospace in the region”.40In a number ofthese regions, aerospace had been demonstrated to form the centre of high-technologyclusters of design and manufacture, with a large number of small and medium sizedenterprises (SMEs) clustered around larger sub-system manufacturers and ‘primes’. Theexample given to us by the SBAC was the aerospace industry based around Airbus UK,BAE Systems and Rolls-Royce in the North West of England, which accounted for 54percent of the high-technology jobs in the region.41

Foreign Direct Investment20. The global nature of aerospace industry collaboration lends itself to companiesinvesting in other countries. There have been a number of overseas companies which havedirectly invested in or purchased UKAI companies.42Recent examples include: theacquisition of Messier-Dowty, a leader in the design, development, manufacture andsupport of landing gear systems, by SNECMA of France and of TRW (Lucas Aerospace), adesigner and manufacturer of commercial and military aerospace systems, by Goodrich ofthe US.43The DTI told us that, according to SBAC estimates in 2003, aerospace companieslocated in the UK which were owned by overseas parent companies accounted for around40 percent of the turnover generated by the UKAI while employing 45,000 people.44

21. The UKAI has also been highly acquisitive in the recent past,45with around fortytakeovers announced in 2004, worth in excess of $3.5 billion.46In particular, BAE Systemsmade five acquisitions in the US, which included Boeing Commercial Electronics andDigital Net Holdings, the latter being a $600 million business which supplies software tothe US Defense Department. Smiths Group also made five US acquisitions during 2004,targeting sensor and detection companies active in the developing safety and securitysectors. The majority of these acquisitions took advantage of the strength of sterlingrelative to the US dollar to acquire technology capability and US market access.47Thistrend is likely to continue with the recent announcement that BAE Systems has bid $2.2billion for United Defense Industries, a US defence company.48

40Appendix 14, para 1.5.141Ibid., para 1.5.242Appendix 943More information on the takeover of Messier-Dowty by SNECMA and TRW (Lucas Aerospace) by Goodrich can be foundon the SNECMA and Goodrich websites (1 March 2005): www.snecma.com and www.goodrich.com/Main44Appendix 945Appendix 3, para 546Appendix 947Ibid.48‘BAE seizes UDI in $4bn raid on US market’, Financial Times on-line (FT.com), available on the Financial Times website (7March 2005): http://news.ft.com/cms/s/527e863c-8edf-11d9-bb12-00000e2511c8.html13

Major UK aerospace companiesBAE Systems (BAE)22. British Aerospace was formed as a nationalised corporation in 1977 by the merger ofthe British Aircraft Corporation, Hawker Siddeley Aviation, Hawker Siddeley Dynamicsand Scottish Aviation. The British Aircraft Corporation itself was the product of takeoversand mergers over the years involving many well known names such as Avro, de Havillandand Vickers. BAE Systems (BAE) came into its present form in 1999 when BritishAerospace and GEC agreed to create a global aerospace and defence company, mergingBritish Aerospace with GEC’s Marconi Electronic Systems business.49

23. BAE remains the UK’s largest engineering company with 36,000 employees in the UK(100,000 in total worldwide) and is now mainly a defence company.50In 2003, BAE hadtotal sales of £12.6 billion, and an order book worth £46 billion.51The company operates inthe aerospace sector in addition to a wide range of other military applications. Theseinclude nuclear submarines, naval warships, radar and communications systems, and flightcontrol systems. In terms of aircraft, BAE has a 33 percent52share in the Eurofighterproject with the European Aeronautic Defence and Space Company N.V. (EADS)53of theNetherlands and Alenia, an Italian company. BAE is also involved in the Joint StrikeFighter (JSF) with Lockheed Martin and Northrop Grumman of the US.24. Eurofighter is a collaborative programme which has been estimated to support 16,000direct UKAI jobs. Although late into service, the DTI told us: “the programme remainsindustrially significant for the UK”.54BAE has the responsibility for the design anddevelopment of the forward fuselages, including the cockpit systems, and the finalassembly of the UK’s part of the order. The DTI also told us that this recognises BAE as“probably the only European aerospace company with the capability to undertake complexavionics, weapons and airframe integration work, sustaining the company’s ability todevelop future air systems”.55The JSF is currently the largest global defence aerospaceprogramme, with the US expected to purchase 2,600 aircraft, the UK 150 and the rest ofworld up to 3,000.56It is a US-led programme, with Lockheed Martin acting as the ‘prime’and the UK as the only ‘tier-one’ partner; the programme is estimated to be worth over £20billion to the UKAI over its production life. BAE is responsible for manufacturing the rearfuselage of the JSF.57Other military aircraft which the company manufactures include the

49A full chronology of BAE Systems’ history can be found on its website (4 March 2005): www.baesystems.com/aboutus/50Appendix 951BAE Systems website (4 March 2005): www.baesystems.com/facts/plc.htm52Trade and Industry Committee, British Aerospace Industry, page 1453EADS came into being on 10 July 2000 from the link-up of the French Aerospatiale Matra, CASA (ConstruccionesAeronáuticas S.A.) of Spain and the German DaimlerChrysler Aerospace AG (Dasa). DaimlerChrysler and the Frenchholding company SOGEADE (Lagardère, French state) each hold over 30 percent. The Spanish state holding companySEPI owns 5.5 percent. The remaining 34 percent of its shares are traded on stock exchanges.54Appendix 955Ibid.56Ibid.57Ibid.14

Hawk (trainer) and the Nimrod (reconnaissance).58Aircraft production is concentrated inWarton and Samlesbury in Lancashire and Brough in East Yorkshire.59

25. BAE no longer produces its regional civil aircraft: the Avro RJ series of jet aircraft(which had superseded the BAe 146) and the Jetstream turboprop aircraft. BAE’s maininvolvement in civil aircraft production is now the Airbus project.60Without thecompany’s shareholding in Airbus, the UK would be largely excluded from the productionof large civil aircraft.Airbus SAS26. Airbus Industrie, the forerunner of Airbus SAS, was established in 1970, with Frenchand German partners. BAE (then British Aerospace) became a full member in 1979.Aerospatiale of France and Deutsche Aerospace Airbus of Germany each had a 37.9percent share, British Aerospace a 20 percent share and Construcciones Aeronáuticas S.A.(CASA) of Spain 4.2 percent.61Airbus SAS is currently 20 percent owned by BAE Systemswith the remainder owned by EADS.27. Starting with just one model, the Airbus range of civil aircraft has gradually expanded,and now covers requirements between 100 (A318 type aircraft) and 555 (A380) seats.62

Airbus is currently enjoying market success. Its share of the large civil aircraft market hasgrown from 8 percent in 1980, to 20 percent in 1992 and 52 percent in 2003, exceedingBoeing in delivery volume and making Airbus the world’s largest supplier of civil aircraft.63

The next milestone for Airbus will be the first flight of the A380, 555 seat ‘super jumbo’ inthe first quarter of 2005. This is due to enter into full service in 2006, and Airbus currentlyhas 129 firm orders.64Airbus has also responded to Boeing’s new 250-seater 7E7‘dreamliner’ aircraft, and has launched a rival model, the A350.28. Airbus is also set to enter the defence market with the A400M military transport(Strategic Transport Aircraft). This is a multi-national European programme and the UKwill take 25 of the 180 currently ordered.

The military transporter is due to have its firstflight in 2008 following assembly in Seville, Spain. Through its holding in the Air Tankerconsortium, Airbus also hopes to provide its Future Strategic Tanker Aircraft (FSTA) tothe MoD.65This will be the largest UK-defence Private Finance Initiative (PFI), worth over£13 billion. Air Tanker was announced as the preferred bidder in early 2004 and ifsuccessful, would bring direct benefits to the UKAI through the use of Airbus’ A330airframe.66Selection of Air Tanker by the UK Government as the preferred bidder has beeninstrumental in placing the A330 as a credible competitor in the air tanker market, which

had previously been dominated by Boeing. For example, Australia has recently opted forthe A330 model for its own defence requirements. The DTI told us that negotiationsbetween the MoD and Air Tanker over the signature of the UK contract were continuing.67

29. Airbus SAS’s UK subsidiary, Airbus UK, has sites in Filton (Bristol), producing ribs forwings, and Broughton (North Wales), where wing skin panels are manufactured and wingsassembled.68Airbus UK told us that they had a workforce of over 12,000 employees in theUK and current Airbus programmes supported: “80,000 UK jobs from direct, indirect andinduced employment. This will rise to around 100,000 UK jobs when the A380 and A400Mprojects reach full production”.69

Rolls-Royce plc30. Already established as a motor manufacturer, Rolls-Royce turned to making aero-engines during the First World War. It was the development of the Merlin engine in the1930s, used for both Spitfires and Hurricanes during the Second World War, whichchanged Rolls-Royce from a relatively small company into a major player.

In 1953, Rolls-Royce moved into civil aircraft, building the Dart engine for the Vickers Viscount airliner.The growth of transatlantic travel in the early 1960s saw the launch of what is still one ofRolls-Royce’s major products, the RB211 engine. There were, however, problems with thisnew engine, which resulted in the company being brought into state ownership in 1971.The Rolls-Royce motor business was separated from the aero-engines division and floatedon the stock exchange in 1973. 1987 saw Rolls-Royce aero-engines return to the privatesector.70

31. Rolls-Royce is now the UK’s sole aero-engine manufacturer and the world’s secondlargest commercial aero-engine supplier, behind General Electrics of the US, with some 30percent of the world market. The company manufactures gas turbine aero-engines forcivilian and military aircraft, including small business jets, passenger airliners, helicoptersand combat aircraft. Rolls-Royce engines are currently used in aircraft operated by 500passenger airlines, 4,000 corporate operators and more than 160 armed forces. Rolls-Royce employs 35,000 people around the world, 40 percent of whom are outside the UK.Annual sales are just under £6 billion, and they currently have an order book valued at over£19 billion.71The company’s main plants in the UK are in Derby, Bristol, Barnoldswickand Anstey.72

32. Through its 32 percent stake in the International Aero Engines (IAE) consortium,Rolls-Royce provides engines for the Airbus A320 family. It also supplies the regional jetand commercial helicopter markets through US–based Rolls-Royce Inc. The companyrecently achieved certification for the Trent 900 engine to power the first flight of the new

Airbus A380 ‘super jumbo’, early in 2005. Also in development is the Trent 1000 derivativewhich will power the Boeing 7E7 ‘dreamliner’. The Trent 1000 remains the only 7E7engine option presently selected by airline customers; in particular, ‘launch’ customer AllNippon Airlines chose the engine in preference over the alternative option from GeneralElectric.73

33. In defence aerospace, Rolls-Royce engines power around one quarter of the world’smilitary fleet. The DTI told us that Rolls-Royce had designed and manufactured the EJ 200engine for the Eurofighter and had a key role on the JSF programme: “particularly owing toits leadership in vertical thrust propulsion”.74

Bombardier Aerospace34. The Canadian Company, Bombardier, is active in the UK (Belfast) through its whollyowned subsidiary Shorts, which it acquired from the UK Government in 1989. ShortBrothers was best known in the first half of the twentieth century for its seaplanes andflying-boats, which had both civilian and military applications. The company was takeninto public ownership in 1943 as a wartime measure. After the Second World War, thecompany was involved in the production of the Canberra aircraft. In the 1950s it wasresponsible for some of the early work on the development of vertical take-off and landing(VTOL) aircraft. In 1988, Short Brothers was offered for sale by the UK Government.75

35. Bombardier told us that Shorts was now their centre of excellence for fuselage andnacelle (a streamlined enclosure for an aircraft engine) design and production, andaccounted for 12 percent of Northern Ireland’s manufacturing exports. The companyemployed around 5,600 people directly, six percent of manufacturing employment inNorthern Ireland, and supported a further 9,000 jobs down its supply chain.76

36. Bombardier’s civil aerospace division now manufactures a range of regional passengeraircraft (CRJ and Q series), business aircraft (including the Learjet) and the Canadair 415amphibious aircraft, a flying boat designed for fire fighting. The DTI told us that the CRJseries is presently experiencing some difficulties in the international market, driven by thepoor financial performance of some of its US airline customers.77This has resulted inrecent job reductions throughout the Bombardier group, including Belfast. The companyrecently announced jobs cuts at Shorts totalling 560 by July 2005, with an additional 330dependant on the future of Delta Airlines in the US.78

37. Bombardier is considering the development of a new family of 110-135 seat aircraft, theCSeries. The company announced in 2004 that it was considering Shorts in Belfast as aproduction site for the CSeries and had opened talks with the Northern Ireland

73Appendix 974Ibid.75A complete history of Bombardier is available on their website (7 March 2005):www.bombardier.com/index.jsp?id=0_0&lang=en&file=/en/0_0/0_0_1_6_2.html76Appendix 7, para 1.277Appendix 978‘Bombardier to cut 560 jobs in Belfast’, Financial Times, 7 October 2004, p417

Development Agency regarding the public support which could be made available.79It ispossible that the UKAI could contribute over 30 percent of the total value of the aircraft, ifit is launched.80

Smiths Group38. Smiths Group is a world leader in electronic systems for civil and military aircraft. Italso specialises in actuation systems, precision components and detection systems. Smithsemploy 5,500 people in 18 sites around the UK. The company is a major supplier to Boeingand Airbus of equipment on all their large civil aircraft as well as on many of Boeing’sbusiness jets. It also provides a range of highly integrated systems for civil and militaryhelicopters and has important positions on current military aircraft, including the JSF, theLockheed Martin F-22 and Hercules C-130J, Boeing F/A-18E/F and Eurofighter.81

3 The UK aerospace industry’s currentperformanceCivil aerospace39. The aerospace market is typically cyclical, with the cycles closely linked to globaleconomic performance. Pre-2001 the civil aerospace sector of the industry was operating atfull capacity with “record production levels of business”.82Our witnesses told us that since2001, a number of events had caused a slowdown in passenger air-travel (civil aviationsector),83which had led to a fall in demand for the UK’s commercial aerospace products.The events our witnesses highlighted included: the impact of the global economicslowdown, which was exacerbated by the terrorist attacks of 11 September 2001 in the US;continued uncertainty in the Middle East, including the conflicts in Afghanistan and Iraq;and the SARS crisis in Asia.84

40. The DTI told us that the civil aviation sector was beginning to recover and thatcommercial aerospace manufacturers were: “planning to increase production rates in 2005with further increases planned for 2006 and beyond”.85Datamonitor have forecast that theglobal civil and defence aerospace sector will grow at an average annual rate of four percentbetween 2003 and 2008, with the highest growth, at six percent, expected in 2007.86Bycomparison, Oxford Economic Forecasting (OEF) have estimated that the UKAI willexpand over the same period by just over eight percent per annum, with the highestgrowth, 12 percent, expected in 2004.87In the long run, worldwide air-passenger travel isexpected to rise significantly, creating growth in the market for civil aircraft. In terms ofaircraft demand, the DTI have forecast that 15,000 aircraft carrying more than 100passengers will be required to be delivered worldwide between 2002 and 2021.88Rolls-Royce have forecast that for the period 2004 to 2023 there will be a total of 43,000 aircraftdelivered, including the production of 20,000 jets carrying more than 110 passengers.89

However, the DTI told us that talk of a recovery may be premature, as some airlines hadcontinued to struggle with continuing high oil prices which threatened their financialperformance.90

Defence aerospace41. Defence aerospace markets are typically less cyclical than civil aerospace markets, withperformance more closely linked to a country’s defence budgets than its economy. TheDTI told us that the US defence budget is expected to increase by around 30 percent in realterms through to 2009, whereas the UK and European defence budgets were likely todecline slightly. This would affect the strategies of many UKAI companies, particularlythose with major US and European subsidiaries: “the nature of defence research andtechnology and equipment procurement will evolve over time to place a greater emphasison the military capability of networked systems and a lower emphasis on platforms,although these will remain important and the change will be gradual given the UK’s [andother Governments’] committed buys of aircraft, ships and land systems”.91Even given theexpected increase in demand for defence aerospace products, our witnesses told us thataccess to defence markets in other countries remained a problem.92In many cases,government controls were in place so that UKAI would not be able to gain a fair marketshare of this growth.Market access42. The globalisation of the aerospace industry on the supply (production) side has notbeen matched on the demand side. This has not been such a major problem for the civilaerospace side of the industry but has remained so for the defence side.93Our witnessestold us that, with the notable exception of the UK, national defence markets “remainlargely entrenched” and closed to foreign entry.94The SBAC, in particular, told us that alack of defence market access, especially in the UK’s main markets of the US and EU,95

could undermine the recent improvement in the performance of the UKAI, post 2001.96

The main stumbling block they identified to wider market access for the UKAI was thequestion of technology transfer: “if we cannot supply, particularly on the defence sidewhere you know we have issues around technology transfer etc., that is quite a significantissue for us on which we have to make progress. Also, we need to keep the playing fieldlevel”.97

43. The restriction of technology transfers between countries can mean that indigenousfirms have an unfair advantage when bidding for national contracts. For example, underthe US’s International Traffic in Arms Regulations (ITAR): “it is unlawful: to export orattempt to export from the United States any defense article or technical data or to furnishany defense service for which a license or written approval is required by this”.98USaerospace companies undertaking a US Government contract do not have to be concerned

about the transfer of technology across borders when they are the single contractor. Incomparison, a US company which collaborated with a UKAI company or a UKAIcompany which bid on its own, is placed at an unfair advantage as it has to ensure thatthere will not be an export of technology which the US Government may considersensitive. The penalties for any person or company found to have wilfully violated theITAR are stringent.99

44. Some UKAI companies have attempted to ‘circumnavigate’ the ITAR by acquiring USaerospace companies as subsidiaries.100However, UKAI companies may not reap the fullbenefits of R&D carried out within their subsidiary, as, under the ITAR, they may beunable to ‘export’ the technology back to the UK.101A lack of access to overseas aerospacetechnologies can also have a secondary impact. The SBAC told us that where the MoD hadinvested in US aerospace programmes, UKAI companies had established subsystem designand manufacturing positions, as demonstrated by the JSF, Airborne Stand-Off Radar(ASTOR), and Hawk fixed-wing trainer. They believed such programmes would be inservice for over 30 years so that: “it is essential that the UK also achieves overall positionson these programmes to ensure that the systems concerned can be supported, upgradedand modified throughout their service life, with the necessary transfer of technology toenable this to happen”.102If UKAI companies were to retain the capability necessary tooffer ongoing maintenance and support for UK Government defence equipment in theUK, as opposed to migrating to the US through acquisition, the SBAC told us that it wascritical that mechanisms were introduced to allow transatlantic technology transfer.103

45. The Government appears to have been keen to effect a solution to the problem oftechnology transfer from the US. In 2002 the Government stated: “A key aim is to concludesuccessfully current negotiations on a waiver from the US International Traffic in ArmsRegulations, which would allow the export of unclassified defence items and technology toUK companies for UK and US use without a requirement for US export licences”.104TheDefense Authorization Act for Fiscal Year 2005 was signed into US law in October 2004.Despite the inclusion of a provision granting an ITAR waiver to the UK in the originalSenate version of the Bill, it was eventually dropped from the final agreed text of the Act,following strong opposition from the House of Representatives. However, duringconference negotiations on the Bill, concessions were agreed between the Senate and theHouse to allow preferential treatment to be given to the UK, and Australia, with respect toexport applications for ITAR-controlled items.105This, the SBAC told us, had “allayedsome of UKAI’s concerns”.106

that the Congress deleted the provisions for an ITAR exemption from the DefenceAuthorisation Act. We welcome the fact that language was included in support of theexpeditious processing of export licence applications and we were discussing the wayforward with the US administration. It has been a constant source of discussion betweenthe Prime Minister and President Bush, Secretary Powell and myself and our officials. It isdisappointing. The administration did its best. On these issues it is for the Executive topropose and for Congress to dispose and they came to a different view. It is disappointing,particularly given what a close and reliable ally we have been for the United States throughthick and thin”.107It remains to be seen if a provision to grant a full ITAR waiver to the UKwill be re-introduced in the Senate in the next Defense Authorization Bill for FY2006,which is scheduled to be examined during 2005. Along with our colleagues on the Defence,Foreign Affairs, and International Development Committees, we are extremelydisappointed that the US Congress has deleted provisions that would have enacted anITAR waiver for the UK.108

47. We asked for the views of the DTI on what UKAI companies could do to overcome theproblems associated with technology transfer, given that an ITAR waiver would not beimmediately forthcoming. They told us: “You [companies] just have to be patient and workthrough it. In terms of the ITAR waiver, it is fair to say that we are slightly disappointedthat it has not been possible to conclude this yet but all we can do is continue in our effortsto work with the US authorities to try and achieve it”.109

48. The UK aerospace industry (UKAI) requires Government help to reduce barriers totrade in terms of technology transfer, especially in the US. We recommend that the UKGovernment should continue to press the US Administration to support increasedaccess to US technology for UKAI companies through an International Traffic in ArmsRegulations (ITAR) waiver for UKAI companies.Emerging international competitors49. Despite high barriers to entry, new competitors are continuing to emerge in developingeconomies, typically driven by government support and a desire to create an indigenousaerospace design and manufacturing capacity.110Examples of emerging competitors in thecivil aerospace market given to us by our witnesses included Chinese and Russian efforts todevelop regional jet programmes. Sir Michael Jenkins, President of Boeing UK, told us theChinese authorities were looking to build around 150 regional airports within the nextdecade.111Overseas partners, such as General Electric, Boeing and SNECMA werecurrently assisting in the design process for a 70-seat Chinese regional jet in order to gainmarket access for their engine and systems products.112However, Sir Michael remaineduncertain whether China would become a major aircraft manufacturer of its own regional

jets, just because indigenous demand had been demonstrated. He cited the example ofJapan which had deliberately chosen not to manufacture its own aircraft but had insteaddecided to concentrate on making subsystems for the main aircraft producers.113

50. Boeing suggested to us that their ‘duopoly’ with Airbus in the sale of large civil aircraftcould be under threat in the long-term from incumbent regional aircraft producers such asBombardier of Canada and Embraer of Brazil, which could move into producing largeraircraft in the future.114

51. Examples of emerging competitors also exist in defence aerospace markets. Korea hasflown its own ‘advanced’ jet trainer and Taiwan has developed its own jet fighter aircraft:“albeit with limited success”.115The DTI told us that these efforts were being assisted by‘licence build agreements’ with foreign companies, where existing manufacturers licensedthe assembly of aircraft ‘kits’ to lower-cost economies. Such agreements allowed thesecountries to acquire the skills of aircraft integration and assembly: “the first step towardsdeveloping a full indigenous capability”.116This would provide further competition for theUKAI.52. There has also been some concern amongst the UKAI community that increasedcompetition from low-cost economies could cause problems at the bottom end of the UKaerospace supply chain. In March 2004, a report commissioned by the FarnboroughAerospace Consortium predicted that between 30 and 50 percent of the UKAI’s smallersuppliers could close due to competition from low-cost economies.117The report foundthat larger UKAI companies had become aware of, and were making use of, firms in lower-cost economies. At the same time, UKAI SMEs were less aware of these benefits and weremore likely to suffer from the increased levels of competition.118

53. We conclude that the challenge from the emergent competitors, be they lower-costeconomies or other developing economies, is growing. Subcontracting abroad isincreasing as a result of lower cost or more favourable incentives, such as public R&Dinvestment. As far as we can see, there has been no official study into the ‘threat’ fromemerging competitors to the UKAI. Research which has been carried out has tended tofocus only on UKAI’s developed competitors. We recommend that the UK Governmentshould undertake a study of these emerging aerospace industries as soon as possible togauge the future challenge to the UKAI.Investment in R&D54. The SBAC told us that the UK’s success in aerospace markets stemmed directly from itsR&D investment, which: “stimulates innovation and knowledge creation, supports

research in universities, and has considerable spin-off benefits into non-aerospaceactivities”.119Investment in R&D also allowed UKAI to: “achieve sustained productivitygrowth and competitiveness, to ultimately deliver a positive contribution to the UKeconomy both nationally and in the regions”.120

55. R&D of all types is difficult to measure and compare, partly due to difficulties indefining the boundaries between research, technology acquisition, development andproduct development, and partly because relevant information is not always made public,or is not compiled on a consistent basis. Moreover, business-funded R&D varies from yearto year, for example according to a company’s cycle of product development, or becauseexternal funding has reduced the need for company funding.121

56. However, the evidence suggests that the UKAI invests heavily in R&D, and is secondonly to pharmaceuticals in its R&D intensity (R&D as a percentage of turnover) in the UK.Between 1996 and 2003, UKAI R&D expenditure averaged 0.2 percent of GDP and tenpercent of total R&D in the UK.122In 2003 alone, UKAI-funded R&D investment was justover £2 billion,123and there were three aerospace companies featured among the top-tenUK R&D investors: BAE Systems (ranked No. 3), Airbus (ranked No. 7) and Rolls-Royce(ranked No. 10), investing £1.7 billion between them.124

57. According to SBAC figures, the average R&D intensity for a UKAI company was 12.3percent of turnover in 2003,125and for the EU the figure was 14.5 percent.126Figures givenfor the proportion of companies’ own R&D as a proportion of turnover vary widely: BAESystems 13.1 percent, Rolls-Royce 5.0 percent, Cobham 4.9 percent, Smiths 4.2 percent,and Alvis 1.7 percent.127Some companies have increased their R&D expenditure, notablyBAE Systems and Airbus; others, such as Rolls-Royce have reduced theirs.128Internationalcomparisons of aerospace companies’ R&D intensity performance show that UKAIcompanies invest more in R&D than their international competitors. For example, of thetop twenty aerospace companies in 2003, BAE Systems was ranked second, only behindFinmeccanica of Italy in terms of R&D intensity (Rolls-Royce was ranked 8th, Cobham 9th,and Smiths 11th).129

58. R&D spending by the UKAI contributes to productivity in the aerospace sector and inthe wider economy too. Recent research by Oxford Economic Forecasting, undertaken forthe SBAC, estimated that the cumulative effect of R&D spending by the UKAI at this levelhas boosted UK GDP by around 2.5 percent, most of which had been experienced outside

the aerospace sector. The SBAC told us that this suggested: “aerospace punches above itsweight in terms of its overall contribution to GDP”.130Since R&D expenditure by aerospacecompanies comes out of their profits and those profits are being squeezed, it is clear thatcompanies are unlikely to be able to increase their own expenditure on R&D to any degreein the future.131However, what matters is not so much what companies themselves arespending on R&D, as the level of overall national aerospace R&D expenditure, includingpublic support for R&D, and how this compares with that of the UKAI’s main competitors.Government funding of R&D59. The UK is “strong on aerospace research and technology, with a resilient academicscience and engineering base, and significant industry funding for applied research andtechnology”.132The DTI told us that the Government had provided £141 million of supportfor UKAI R&D since 1997.133This had been provided mainly through the Civil AircraftResearch and Technology Demonstration (CARAD) programme.60. Government funding, provided through CARAD, was aimed at helping ‘key’ sectors ofthe UKAI to maintain a technology base, which would be needed for UKAI companies toremain competitive in world markets. Funding was provided for long-term, pre-competitive R&D into airframes, avionics and aero-engine systems in the UK aerospaceindustry, universities and research establishments. When the CARAD programme wasoriginally introduced, part of the funding was channelled through the then DefenceResearch Agency. This enabled the UK civil aerospace sector to gain access to the UK’sleading aerospace research organisation. An example of the projects which were grantedsupport through CARAD, was the construction of the European Transonic Windtunnel(ETW) for airflow testing, a collaborative project with Germany, France and theNetherlands, which is located near the Cologne/Bonn airport in Germany.134CARAD hasnow closed but existing projects will run to completion until 2007, with funding of £50million during this period.135

61. The SBAC told us that UK Government investment in aerospace R&D had reduced“substantially in recent years […] investment in civil aerospace R&D via the DTI fell from£104 million in FY1972 to £21.1 million in FY2004”.136Further, MoD air applied researchfunding had also fallen from £250 million to £185 million in the last six years.137The SBACsuggested to us that this had had “a major impact on the overall aerospace sector”.138

62. We asked the DTI why the Government had ceased direct support to the UKAI forR&D through programmes such as CARAD. They told us: “what we have moved away

from programmes which are geared to supporting particular sectors to programmes whichare cross-sectoral in nature. If you take technology programmes, that is probably to thebenefit of the aerospace industry because the amount of funding that they were able toaccess under the previous DTI technology funding was relatively limited, about £20 milliona year. They [the UKAI] do not have a special fund for aerospace but they have access to atechnology fund and as one of the two sectors in the UK, along with pharmaceuticalswhich are high R&D, that gives them probably more opportunity than they have with asmaller, dedicated fund”.139

63. The support given for R&D under the DTI’s Technology Programme (technologyfund), for which the UKAI can now apply, includes the Collaborative Research &Development (CR&D) grant and Knowledge Transfer Networks (KTNs).140CR&D grantsare designed to aid UK companies to take advantage of technological developments byreducing their financial risks. Grants are available for support of between 25 percent and 75percent of the R&D costs. KTNs are aimed at helping UK companies find out what is newin technology, or national and international policies which may be of benefit to them. TheKTNs can also aid UK companies to find suitable collaborative partners.141

64. DTI funding for the UKAI through the latest Technology Programme call forapplications (April 2004) amounted to around one quarter of the £60 million distributed.142

The Government also announced that just under £19 million of public funding (includingmoney from the April 2004 DTI Technology Strategy call) will be made available for aNational Composites Network to: “disseminate composites technology for the aerospace,automotive and other market sectors”.143EU funding is also available for the UKAI fromthe Framework Programmes for R&D, of which around €800 million (over four years) hasbeen earmarked for aerospace programmes. The DTI told us that the UKAI tends to gainbetween ten to 15 percent of this figure,144which translates to between £14 million and £21million per annum.145The next call for Technology Programme applications wasannounced on 15 March 2004.146

65. UKAI companies are also eligible for R&D tax credits, through the Inland Revenue,and launch aid through the DTI. As the DTI told us, CR&D, KTNs and R&D tax creditsare non-sector specific. We looked at these programmes in detail in our recent inquiry intothe knowledge-driven economy and we do not discuss them further here.147However,launch aid remains a Government programme which is specifically aimed at supportingthe UK’s civil aerospace industry.

Repayable launch investment (RLI)66. The UK civil aerospace industry receives assistance from the Government in the formof ‘launch aid’. ‘Launch aid’ is a misleading name, since it implies a straightforward subsidy,whereas the money is intended to be repaid to the Government with interest. A moreappropriate term, and the preferred term used within the industry, is ‘repayable launchinvestment’ (RLI).148The DTI describes RLI in the following terms: “Launch Investment isa UK government investment in the design and development of civil aerospace projects. Itis repayable at a real rate of return, usually via levies on sales of the product. Thegovernment shares in the risk, as the company may not achieve sales at the level or priceforecast. Launch investment is available only to the aerospace sector as outlined in the CivilAviation Act 1982”.149

67. Aerospace projects are characterised by high costs and long payback periods.150RLI isintended to remedy a deficiency in the capital markets, which arises from the reluctance orinability of companies or institutions to finance the heavy ‘front-ended’ development costsof new aerospace projects, since the return is high risk and long-term.151By providing RLI,the Government shares in the risk of a project, as a company may abandon the project ornot achieve the level of sales, or the price, forecast. Aerospace projects are also highlyinternational, and so RLI enables the Government to secure ‘valuable’ projects for theUKAI, which might otherwise be carried out elsewhere.152

68. The provision of RLI is entirely discretionary. There is no formal scheme, promotion orbudget for RLI. Each application is considered on its merits against a range of establishedcriteria and also, by the Treasury, against public expenditure constraints.153We asked theDTI what the process was, once an application had been made by a company, includinghow and when repayments were made. They told us that applications are subject to arigorous evaluation with the following characteristics:

— In applying for RLI, companies have to set out the nature of the project and theirbusiness plan for delivering it. The DTI undertakes market, financial and technicalanalysis of the project, including assessing the wider economic benefits to the UK;— Applicants must demonstrate that the project is commercially and technically viable,and that it would not go ahead without Government support;

— Once an evaluation is complete, a recommendation is made to Ministers;— There is no guarantee that a positive recommendation to support a project will result inan offer to the applicant, and the decision to put public funds into a project is balancedagainst other public sector funding priorities;

— If RLI is offered to a company, a contract is negotiated which sets out the terms andconditions. Each project is different and therefore the terms and conditions of thecontracts vary. They have evolved over time to take account of policy developmentsand to meet the UK’s international obligations (for example, if European Commissionpermission is required); then— After the contracts have been concluded, the DTI holds regular meetings with thecompany concerned to monitor the progress of the project.154

69. RLI payments are made for eligible development costs to companies in the early yearsof a project. Repayments, when paid, are usually based on a per-aircraft or per-engine levy.These are set at a level to achieve the repayment of RLI with a target rate of interest andwithin a specified period of time.155

70. RLI is open in principle to any UK-based aerospace company. In the past, RLIs havetended to be large projects and relatively few in number. Since 1982, four companies—Airbus, Rolls-Royce, Westland Helicopters (now part of Finnemeccanica of Italy) andShort Brothers (now part of Bombardier)—have been provided with RLI. RLI has beengranted to Airbus for the A320 and A330/A340 programmes and most recently for theA380 ‘super-jumbo’ programme (£530 million). Rolls-Royce has been granted RLI for thedevelopment of the RB 211 engine, the Trent ‘family’ of engines, and recently the latest Trent900 engine (£450 million) for the A380. Westland Helicopters have also received RLI for thedevelopment of the EH101 military utility medium lift helicopter, while Short Brothersreceived RLI for the development of the Lear 45 medium sized corporate jet. The DTI hasnoted that all these programmes have either repaid at their expected rate of return or are oncourse to do so.156Government expenditure on RLI from 1982 to 2003/04 was just over£2,039 million, while repayments amounted to just over £1,639 million.157

71. All our witnesses agreed that the continuation of RLI was essential for the UKAI toremain competitive.158The SBAC believes that RLI has been: “fundamental to maintainingleadership in technology, skills, product innovation and environmental enhancement.Aerospace firms are internationally mobile and will continue to be attracted bygovernment support. Without RLI the UK civil aerospace industry will contract and theUK will lose a world class industry”.159Mr Iain Gray, Managing Director of Airbus UK,told us: “Launch Investment is a hugely important part of Airbus. If we did not have theLaunch Investment mechanism here in the UK, I do not believe we would have had thelevel of work that we have enjoyed both within our own company and the supply chain inthe UK over the last decade”.160Clearly there have been many UKAI projects which couldnot have proceeded, or would have required much greater foreign participation, but for

RLI. Indeed, if the criterion that projects are supported only if they would not otherwise goahead has been fully applied, none of the projects assisted would otherwise have proceeded.72. Nevertheless, the industry has criticisms of the way the scheme operates. Mr ColinGreen, Vice-President of the SBAC and President—Defence Aerospace at Rolls-Royce, toldus that the programme was designated as a ‘one time only’ source of funding for a projectas opposed to being part of an annual budget: “the overriding criticism we have had in thepast has been that it is by its nature a one-off decision […] We [the SBAC] would like tosee it being more recognised as a normal way of doing business rather than being treated asa one-off in every case”.161The Royal Aeronautical Society (RAS) told us: “the difficultiesfaced by equipment manufacturers in qualifying for Repayable Launch Investment willundermine UK competitiveness as their financial and technical risks increased”.162

Although UKAI equipment companies are not specifically excluded from applying for RLI,according to the information given to us by the DTI, no equipment company has receivedlaunch aid since 1982.163Equipment manufacturers wishing to obtain RLI, such as Dowtyin 1986-88, appear to have been discouraged from applying. This could be because thedevelopment of equipment costs less, has shorter timescales, and the probability of makinga commercial return within a reasonable time scale is much higher for equipmentmanufacturers than for makers of airframes or aero-engines.164

73. We believe that the development of aerospace equipment has become increasinglycomplex, risky and expensive and in some cases these investments may represent aproportionally larger financial commitment by the companies concerned thaninvestments which are currently supported by repayable launch investment (RLI). Werecommend that the DTI adopts a more positive attitude towards applications byequipment makers for RLI, and that it takes into account the size and resources ofequipment companies when assessing whether or not projects require RLI to go ahead.International comparisons of public support for aerospace74. We believe an important criterion on which Government support for the UKAI shouldbe assessed is how it compares with the support given by foreign governments to theUKAI’s main competitors and collaborators. Unfortunately, such comparisons are difficultto make, since not only do methods of support vary from country to country, but much ofthe support given to individual companies by governments is treated as confidential,especially for defence-related R&D.165However, Dr Sally Howes, Director General of theSBAC, told us that the AeIGT Report on the UKAI had estimated that support for researchand technology (R&T) ( a stricter definition of R&D) by the US Government had providedinvestment to US civil aerospace companies worth £620 million in 1998, compared togovernment support of £120 million in Germany, £50 million in France and £20 million inthe UK.166These figures suggested that the public support given to the UKAI for R&D was

less than that given to the aerospace industries of the UKAI’s main competitors by theirgovernments.167However, the AeIGT Report readily admitted that its conclusions took noaccount of government support for UKAI R&D through RLI and R&D tax credits.168

Further, since the report was published, increased support for the UKAI through the DTI’snew Technology Programmes has also become available.75. We asked the DTI if they could shed some light on the overall level of governmentsupport provided to the UKAI’s main competitors through programmes such as RLI. Theytold us: “in order to get an idea of this you would need to see individual contracts. Youwould need to get into the detail of the agreements that the governments strike with thecompanies and of course that is highly commercially sensitive”.169We were concerned withthe apparent lack of UK Government information about the support given by othercountries to their aerospace industries and asked the DTI how they would know othercountries’ aerospace industries were not being subsidised beyond ‘reasonable grounds’.They told us: “there are a number of checks and balances in the system. For some launchinvestment, the European Commission will scrutinise the details. Under the 1992agreement [The 1992 EC/US Agreement on Trade in Large Civil Aircraft], there are sometransparency arrangements which we had in the US, where both sides would provide theother with details of support given to industry”.170

76. We recommend that the Government conducts a study into the subsidies which areavailable to other aerospace industries within the EU. If such a study suggests that theUK’s European competitors are giving aid to their aerospace industries which couldinfringe state aid rules, this should be reported to the European Commission at theearliest opportunity. If other EU Member States appear uncooperative, the UKGovernment should ask the European Commission to carry out its own investigation ofassistance given to the aerospace industry across the EU.77. We conclude that Government support for UKAI R&D has fallen over the last fewyears. The recent re-organisation of DTI funding programmes has opened newopportunities for aerospace R&D funding through the Technology Programmes, suchas the Collaborative Research & Development grants and Knowledge TransferNetworks programmes. Aerospace companies are also able to benefit from R&D taxcredits. There is, as yet, little evidence as to whether these new funding streams willcompensate the UKAI for the loss of the Civil Aircraft Research and TechnologyDemonstration (CARAD) programme. However, evidence from the distribution oflatest round of Technology Programme funding, where the aerospace industry receiveda quarter of the £60 million, suggests to us that they might.

167See Qq 164 and 116168DTI/AeIGT, An Independent Report on the Future of the UK Aerospace Industry, June 2003, page 49169Q 207170Q 20830

4 The dispute before the World TradeOrganisation78. During our inquiry, witnesses highlighted their concerns about the recent trade disputebetween the US Government and the EU over the public sector support which had beengiven to the civil aerospace sector, and how the dispute would affect the UKAI.171

The 1992 EC/US Agreement on Trade in Large Civil Aircraft79. A bilateral agreement between the EU and the US on financial support for large civilaircraft has been in existence since 1992 (EC-US Agreement on Trade in Large CivilAircraft).172Signed under the auspices of the General Agreement on Tariffs and Trade(GATT), the agreement established: limits on, interest rates and repayment periods for, thepublic support given to all Airbus aircraft and aircraft with capacity of 100 or more seatsmanufactured in the US

;173a number of mutual commitments to monitor the agreement;and institutional arrangements for future dialogue between the two parties on this issue.More specifically:— Restriction of launch aid to 33 percent of total development cost, with 25 percent to berepaid at the cost of government borrowing and the remaining eight percent to berepaid at the cost of government borrowing plus one percent;— A maximum reimbursement period of 17 years, and 20 percent of the repayments to bemade over the first 40 percent of aircraft deliveries (and 70 percent over the first 85percent);— An overall limit per annum on indirect support equivalent to three percent of the civilaircraft industry’s annual commercial turnover in the country concerned and fourpercent of the annual commercial turnover of any one firm; and— Controls on general purpose loans and sales inducements.174

80. The agreement outlined two forms of support: ‘direct’, such as RLI favoured by EUMember States’ governments; and ‘indirect’ such as R&D support favoured by the USGovernment.The current dispute81. In recent negotiations on a renewed deal, the US (and Boeing) were looking to ban allnew state aid to large civil aircraft, but these discussions broke down in September 2004.This prompted the US to initiate the first steps towards the WTO’s Dispute Settlement

Proceedings in October 2004, by requesting formal consultations with the EU and thegovernments of the UK, France, Germany and Spain. The US Government alleged that $15billion in ‘illegal aid’ had been paid to Airbus, particularly for the new A380 ‘super-jumbo’programme.175Their objections focussed around EU levy-based investment programmes(such as RLI), which, the US claimed, were given at either zero or below market rates ofinterest, and the fact that RLI did not have to be repaid if a new model was notsuccessful.176

82. On the same day, the EU retaliated by launching counter-proceedings against the US,alleging that Boeing had ‘illegally’ been given $23 billion by the US public sector.177The EUclaimed that the US Government had subsidised Boeing mainly through R&D grants fromNASA and Department of Defense programmes but also through individual US Statesoffering tax breaks and grants to attract Boeing manufacturing plants.178AmbassadorRobert Zoellick, the US Trade Representative, also announced that the US would terminatethe 1992 agreement, exercising a right provided in the agreement itself, a move which wasrejected by the EU.179

83. When we asked the Department for their views on the WTO negotiations, officials tookpains to stress to us the political sensitivity involved: “this case is at a very sensitive stage atthe moment so I would rather not speculate on what the outcomes might be”.180Shortlyafter we heard the Department’s evidence, the WTO Director-General, SupachaiPanitchpakdi, announced that the EU and the US were “to negotiate a bilateral resolutionto their ongoing dispute concerning aircraft subsidies rather than continue the cases theyhad brought in October to the WTO’s Dispute Settlement Body”.181We will continue tomaintain a watching brief on developments in this highly sensitive case.

175WTO, European Communities and Certain Member States - Measures Affecting Trade in Large Civil Aircraft - Requestfor Consultations by the United States, DS316, 12 October 2004176The communication also claimed that a loan to EADS from the European Investment Bank for the A380 could beconsidered an export subsidy in breach of Articles 3.1(a) and 3.2 of the WTO Agreement on Subsidies andCountervailing Measures (SCM Agreement).177WTO, United States - Measures Affecting Trade in Large Civil Aircraft - Request for Consultations by the EuropeanCommunities, DS317, 12 October 2004178Appendix 2, para 3.3179See: US Trade Representative, U.S. Files WTO Case Against EU Over Unfair Airbus Subsidies, Press Release,6 October 2004 and European Commission, US-Boeing: EU rejects US unilateral abrogation of the 92 aircraftagreement, Press Release, 8 October 2004

5 Aerospace Innovation and Growth Team(AeIGT)Background84. In 2002 the Secretary of State asked Sir Richard Evans, former chairman of BAESystems, to establish an Aerospace Innovation and Growth Team (AeIGT) to look at thefuture of the UKAI. The Team’s brief was to draw on the expertise of the majorstakeholders in the UKAI and look 20 years ahead to consider ways in which UK aerospacecould continue to remain globally competitive, with the vision that by 2022: “the UK willoffer a global Aerospace Industry the world’s most innovative and productive location,leading to sustainable growth for all its stakeholders”.182The AeIGT’s first report, publishedin June 2003, contained a set of objective recommendations on how to make that vision areality:— Research and Technology: “The UK must sustain a level of focused Aerospace appliedresearch and demonstration sufficient to maintain and enhance the UK’s position inthe global Aerospace market”;— Process Excellence: “The UK must systematically and continuously deliverproductivity improvement at a rate faster than its competitors”;— Skills and People Management: “UK Industry must continuously develop a world-class workforce”;— Environment, Safety and Security: “The UK must be at the forefront of internationalsustainable development of the Aerospace Industry in the areas of safety, security,capacity and the environment”; and— Socio-economic environment: “Deliver the macroeconomic conditions, the widersocio-economic environment and focused policies required to improve UKAerospace’s competitive advantage and its potential to thrive in world markets.”183

85. Following the publication of the Report, the AeGIT programme moved into an initialimplementation stage, running from August 2003 to July 2004. July 2004 onwards has beendescribed as the second implementation stage. We previously took evidence on the work ofthe AeIGT in 2003.184This section of the Report looks at the progress which has been madetowards the recommendations of the AeIGT since that time, in particular theestablishment of a National Aerospace Technology Strategy (NATS), and measures toreduce the productivity gap with the UKAI’s main competitors through ProductExcellence.

182DTI/AeGIT, An Independent Report on the Future of the UK Aerospace Industry, June 2003, p 10183Ibid.184See: Trade and Industry Committee, Minutes of Evidence for Tuesday 15 July 2003, Session 2002-03, HC 1023-i33

Research and technology (R&T)86. The AeIGT Report recommended the establishment of a National AerospaceTechnology Strategy (NATS) as a partnership between industry, government andacademia.185This recommendation was based on the following grounds:— The success of the UKAI depending on the ability to deploy world-class technology,which required long-term investment in research;— Aerospace being a safety critical and highly regulated industry, which required focusedresearch and validation before new technology could be applied. The strength of theUKAI stems from its history of R&D programmes, promoted by governments incollaboration with the UKAI, and aimed at bridging the gap between pure science andindustrial exploitation; and— The major UKAI companies having a global footprint. While prepared to invest intechnology acquisition, they have tended to do so where the conditions are mostfavourable and, in particular, where they can work in partnership withgovernment-funded R&D.186

87. Following acceptance of the AeIGT’s recommendations, implementation of the NATScommenced in September 2003, under the leadership of the Aerospace TechnologySteering Group (ATSG),187with Mr Ken Maciver, former President and Chief ExecutiveOfficer of TRW Aeronautical Systems, as Chairman. When giving evidence to us on behalfof the ATSG, Mr Maciver reiterated the basis for the AeIGT’s recommendation for aNATS.188

National Aerospace Technology Strategy (NATS)88. The NATS - Implementation Report was published in July 2004.189The Report definedthe background, process and structures necessary for the implementation of the NATS.The ATSG told they believed that the NATS addressed the challenges faced by the UKAI,through the mechanisms of research and validation of ‘key’ and ‘enabling’ technologies,190

supported by coordinated and balanced public and private sector investment.191TheStrategy describes how the required research and validation must be realised through: “aphased programme involving industrial, university and research establishmentpartnerships, defined through Aerospace Innovation Networks (AINs) and Aerospace

Technology Validation Programmes (ATVPs)”,192which build upon a number of existingmechanisms.193

Aerospace Innovation Networks (AINs)89. AINs are based on Defence Technology Centres (DTCs),194a model of a group ofcompanies and technology providers, with a focus on a specific research theme. However,DTCs serve only the MoD’s technology requirements and the defence industry. AINs willprovide a similar mechanism to serve the civil aerospace sector (with some possible dualdefence/civil aerospace applications).195Unlike DTCs, the facilities and research of theAINs will be open to any company willing to make the required financial commitment.196

91. The NATS Implementation Report suggested that DTI support for establishing theAINs would be drawn from the Department’s Technology Programme, through theKnowledge Transfer Networks (KTNs) programme,199and support for specific projectsthrough the Collaborative R&D programme.200

Aerospace Technology Validation Programmes (ATVPs)92. ATVPs are based on a US model, which has recently been adopted by the EuropeanCommission for its Framework Programme for R&D and will: “make a major contributionto risk reduction in down-stream product programmes, as well as generating valuableexperience and capabilities in technology integration”.201Each ATVP will be led by a singleUKAI company and jointly funded by central Government, regions and industry butinvolving a group of industrial partners and selected universities and researchestablishments, jointly undertaking one of the specified ATVPs.93. The NATS Implementation Report suggested that there would be six ATVPs required,which it identified as:— Civil Powered Wing;— Environmentally Friendly Engine;— More Electric Aircraft;— Autonomous Systems;— Future Air Battlespace; and— Air Traffic Management.202

94. ATVP funding will be sought from similar sources to that of the AINs. It is expectedthat the DTI will provide support through the Collaborative R&D programme and throughoverall co-ordination of public sector funding streams. This will be matched by UKAIsupport and supplemented by funds from the EC Framework Programme for R&D,Research Councils (primarily the Engineering and Physical Sciences Research Council(EPSRC) for underpinning research), and the Regional Development Agencies (RDAs).Which RDAs would be approached to support each ATVP project depends on the siting offacilities, the location of prime suppliers of components, or the prime integrator.203

95. AINs and ATVPs are expected to start in 2005 and all the programmes are required tohave started by 2008. Priority has been given to establishing AINs and ATVPs in aerospace

sectors where there is currently little activity, or where funding may be due to end, forexample project funding from the now defunct CARAD programme.204

Funding the NATS96. The AeIGT estimated that the level of funding required for each AIN will rise toaround £10 million per annum,205while the funding required for each major ATVP willcost between £20 million and £200 million.206The NATS Implementation Report estimatedthe total cost of NATS would be in the region of £300 million per annum.207For this to beprovided, the report identified the need for an additional £50 million of public sectorsupport per annum for civil and dual use (civil and defence) applied research andtechnology validation.208

97. The termination of the Civil Aircraft Research and Technology Demonstration(CARAD) programme has left the UK as the only country with a major aerospace sectorwhich does not have a dedicated publicly-funded civil aerospace research programme.209Inconsequence the NATS will have to compete for DTI innovation funding on a non-sectoralbasis.210The ATSG told us: “it is already clear [to them] that the innovation fundingavailable from the DTI is inadequate to support the NATS on the basis originally envisagedand that the public share of funding for the NATS will have to come from RegionalDevelopment Agencies (RDAs), Devolved Administrations and Research Councils as wellas the traditional DTI and MoD Sources”.211

98. The ATSG also told us that the Government had already recognised the challenge itfaced in co-ordinating the funding streams which would be required to enable the NATS tobe put into action.212In February 2004, the Prime Minister assigned the task of co-ordinating public funding for the NATS to the Minister for Science and Innovation, LordSainsbury, who convened a National Aerospace Strategy Group (NASG) for thispurpose.213We asked the DTI if they could tell us about the role and remit of the NASG.They told us that Lord Sainsbury: “chairs this group, which brings together all thosedepartments: the MoD, ourselves [the DTI], representatives of the RDAs and EPSRC, thathave a potential interest as either funders or as interested in the technology strategy. Thatgroup has the particular remit to help deliver the strategy […] Lord Sainsbury holdsmeetings with industry and attends those meetings. We take stock of progress and say,‘How did this call go? How are we getting on in developing the detailed programmes andprojects’ that we were talking about earlier? Once they have been identified, how can these

be funded?”.214And later: “the onus is on us to coordinate the various public sector bodiesthat are potentially able to fund this”.215

99. We were interested to find out how the progress towards the implementation of NATSand the work of the NASG was being reported. The DTI told us that the formal reportingprocess was through the executive of the AeIGT and through themselves: “we track itourselves because we are trying to act as the co-ordinators. There will be milestones. Giventhat this is tending to revolve around the DTI technology strategy calls and those are madeevery six months, one significant milestone is how successful are the projects that are putinto that call, because it is a competitive bidding process, in terms of securing funding.That will be pretty clear and pretty public. Whether, for instance, the AerospaceTechnology Group that produced the implementation report will want to have an annualreport on how it is going I do not know. That is something that maybe they would want todo. I do not think we have discussed that with them particularly”.216

100. We are content that the DTI holds a ‘watching brief’ over the implementation ofthe National Aerospace Technology Strategy (NATS) by the Aerospace TechnologySteering Group (ATSG) and the co-ordination of funding for the NATS by the NationalAerospace Strategy Group (NASG). However, we believe that there is a wider publicinterest which needs to be addressed. We therefore recommend that a report be madeto Parliament annually by the Government on the progress that has been made towardsthe NATS. This should, as a minimum, include a report on the work of the ATSG andthe progress that has been made by the NASG.101. Aerospace is a technology-intensive industry and the benefits from public sectorinvestment in aerospace R&D are not confined solely to the industry itself. This iswitnessed by the number of ‘technology spill-overs’ into the wider economy, which hasallowed other sectors, such as the UK motor racing industry, to be world beaters. Werecommend that the work of the National Aerospace Strategy Group should beprioritised and the public funding requirements of the NATS be granted so that thevision of the Aerospace Innovation and Growth Team, that the UK will continue to berecognised as one of the world’s most innovative and productive locations, can berealised.Process Excellence102. Despite improvements over the past ten years, the UKAI continues to lag behindother countries in terms of aerospace industry productivity. For example, in 2001, UKAIproductivity was 75 percent that of the US aerospace industry (table 4).217In response tothe UKAI’s continuing productivity ranking, the AeIGT Report called for the wider useand take up of Process Excellence techniques within the UKAI supply chain.218Although

the report acknowledged that Process Excellence techniques were already used within theUKAI supply chain, the AeIGT advocated that there was a need for their wider adoption toimprove the UKAI’s productivity ranking: “by 2022, UK Aerospace must exhibit world-class Process Excellence across complete businesses and extended enterprises, andthroughout entire supply chains”.219The AeIGT Process Excellence Working Group(PEWG) has been leading on the implementation of the Process Excellence objective.However, this working group has now been amalgamated with the SBAC’s EnterpriseExcellence Board (EEB). The new EEB, chaired by Dr John Ferrie (Managing Director ofSmiths Aerospace), held its first meeting in November 2004.220

103. Prior to its amalgamation with the EEB, the PEWG launched a number of ProductExcellence pilot programmes to: “provide a catalyst for productivity improvement acrossentire supply chains, and the promotion of initiatives such as the UK Lean AerospaceInitiative and Supply Chain Relationships In Action (SCRIA)”.221In the autumn of 2003,three pilots were launched to demonstrate Process Excellence:— Pilot 1: The A318/319/320 Fuel Quantity Indication System. Led by Smiths Aerospace;— Pilot 2: The Meteor Missile Fin Actuation System Supply Chain. Led by ClaverhamLimited; and— Pilot 3: The Tornado Tactical Data Link Supply Chain, Tactical Information ExchangeCapability (TIEC). Led by BAE Systems.222

104. The pilots adopted an untraditional approach in that they were not led in a ‘top-down’method by a ‘prime’ aerospace manufacturer, as had traditionally been the case, but by thenext layer down (a ‘tier 1’ aerospace company). Each pilot considered a specific supplychain, its constituent components and how those companies in the supply chain couldwork collaboratively to improve their business performance. This focus on the supplychain enabled proven improvements to be disseminated within other supply chains acrossthe participant companies.223

105. The pilot programmes are now complete and ‘step change’ improvements againstquality, cost and delivery targets have been achieved.224For example, a 15 percent pricereduction in Pilot 1 was achieved, as was a two-year lead time reduction in Pilot 3. The EEBis expected to launch further pilots in the near future. The results from all these pilots willcreate the basis for a Directory of Learning, which will act as an evolving industry resource,as new experience is gained.225The prototype Directory of Learning is expected to beavailable by May 2005, at which point the EEB will consult with stakeholders within theUKAI, for feedback and validation.226

219DTI/AeGIT, An Independent Report on the Future of the UK Aerospace Industry, June 2003, page 73220EEB Pilots Paving Way for Process Excellence, AeIGT News, February 2005221Ibid.222AeIGT website (14 March 2005): www.aeigt.co.uk/workinggroup2.shtml223EEB Pilots Paving Way for Process Excellence, AeIGT News, February 2005224Ibid.225Appendix 9226EEB Pilots Paving Way for Process Excellence, AeIGT News, February 200539

Skills and People Management106. The AeIGT Report concluded that it was necessary for the UKAI to develop a world-class workforce to ‘drive through’ R&D from innovation to production and: “must takeaction to quantify its skills requirements and to ensure that they are met by continuoustraining and development of its world class workforce”.227The Science, Engineering andManufacturing Training Agency (SEMTA) is currently working with the AeIGT andacademia to produce an Aerospace Sector Skills Agreement.228The DTI told us there wasalready a clear view of the current and future skills need, which would be covered by suchan agreement. These were:

107. The DTI also told us that the UKAI was working on a “gap analysis and costed actionplan”, which would be fed into the work of the Department of Education and Skills. TheGovernment was also funding a study by Templeton College, Oxford, into the practicesand constituents of a High Performance Work Organisation (HPWO),230a plan beingdelivered by the SBAC in conjunction with Amicus.231In order to spread and capture bestpractice from HPWOs, the SBAC’s People Management Board (PMB) and EEB arecollaborating to increase the awareness and engagement of the UKAI through aconsolidated regional roll-out programme.232The DTI told us that the final results of theHPWO study are expected to be available towards the end of 2005.233

Safety, Security and Environment108. The AeIGT Report concluded that the UKAI must be at the forefront of ensuringsafety and security in aerospace and aviation, as well as setting and meeting environmentalstandards.234The SBAC told us that the activities of the Safety, Security & the EnvironmentWorking Group (SSE) were moving forward with the National Aerospace TechnologyStrategy (NATS), of which sustainability was a central theme. Further, the programme of

Research under the SSE programme will initially be focused on the need to have a betterunderstanding of the impact of aircraft emissions (contrails) on the upper-atmosphere, andthe role which future air traffic management might play in diminishing that impact. TheAeIGT is currently talking to the Natural Environment Research Council (NERC) andEPSRC about a jointly-funded research project into the impact of aircraft on theenvironment and others were already discussing plans for a new national institute foraviation and the environment.236

109. The SBAC told us that an UKAI-wide sustainability strategy, the CommercialAviation Sustainability Strategy (CASS), would be published sometime during 2005.237TheStrategy will be “a blueprint for achieving sustainable aviation, which requires consolidatedsupport from the major UK industrial stakeholders including airports, airlines and AirTraffic Management operators. Currently these stakeholders are making progress towardsachieving a consensus of agreement and in signing-up to the commitments set out in theCASS”.238

Socio-Economic Environment110. The AeIGT Report recommended that the UKAI should develop an aerospace marketobservatory to create: “a single analysis and intelligence system for the benefit of industry,government and universities, and a [online] portal to inform companies of all the sourcesand forms of support and advice that were available to them”.239The Market Observatoryand Aerospace Portal concept ‘demonstrators’ were launched at FarnboroughInternational 2004.240The Aerospace Portal is intended to inform UKAI companies of thesources and forms of support and advice which are available to them. The MarketObservatory, by contrast, looks at the sources of fact-based information and analysis. TheSBAC told us that, eventually, the Observatory “will generate its own research forstakeholders in the industry”.241

111. The AeIGT’s Aerospace Finance Working Group (continued from the original AeIGTteam) is currently drawing together a report to summarise the investigations it has carriedout into the productivity of the UKAI, the economic benefits of externalities (the economicbenefits to the wider economy from spill-overs from the aerospace industry), and the roleof capital markets with respect to the provision of development capital for UKAI.242

112. The work of the Aerospace Innovation and Growth Team (AeIGT) is a primeexample of what can be achieved for an industry through the willing collaboration of all

of its stakeholders. The UKAI is one of the most important sectors of the UK economyand we believe that, through its support for the AeIGT, this has been recognised by theGovernment.113. With a target date of 2022 for the implementation of the recommendations of theAeIGT’s Report on the future of the UKAI, we believe it will be some time before ameaningful assessment of progress towards the vision of the AeIGT can be made withany degree of confidence. However, the progress which has been reported to us suggeststhat a ‘good start’ has already been made. We have no doubt that our successors willwish to investigate the competitiveness of the UKAI before 2022. The progress madetowards the AeIGT’s vision, that by 2022 “the UK will offer a global Aerospace Industrythe world’s most innovative and productive location, leading to sustainable growth forall its stakeholders”, would doubtless be one of the main areas that they would wish tolook at.42

Conclusions and recommendations1. The UK aerospace industry (UKAI) requires Government help to reduce barriers totrade in terms of technology transfer, especially in the US. We recommend that theUK Government should continue to press the US Administration to supportincreased access to US technology for UKAI companies through an InternationalTraffic in Arms Regulations (ITAR) waiver for UKAI companies. (Paragraph 48)2. We conclude that the challenge from the emergent competitors, be they lower-costeconomies or other developing economies, is growing. Subcontracting abroad isincreasing as a result of lower cost or more favourable incentives, such as publicR&D investment. As far as we can see, there has been no official study into the‘threat’ from emerging competitors to the UKAI. Research which has been carriedout has tended to focus only on UKAI’s developed competitors. We recommend thatthe UK Government should undertake a study of these emerging aerospaceindustries as soon as possible to gauge the future challenge to the UKAI. (Paragraph53)3. We believe that the development of aerospace equipment has become increasinglycomplex, risky and expensive and in some cases these investments may represent aproportionally larger financial commitment by the companies concerned thaninvestments which are currently supported by repayable launch investment (RLI).We recommend that the DTI adopts a more positive attitude towards applications byequipment makers for RLI, and that it takes into account the size and resources ofequipment companies when assessing whether or not projects require RLI to goahead. (Paragraph 73)4. We recommend that the Government conducts a study into the subsidies which areavailable to other aerospace industries within the EU. If such a study suggests thatour European competitors are giving aid to their aerospace industries which couldinfringe state aid rules, this should be reported to the European Commission at theearliest opportunity. If other EU Member States appear uncooperative, the UKGovernment should ask the European Commission to carry out its own investigationof assistance given to the aerospace industry across the EU. (Paragraph 76)5. We conclude that Government support for UKAI R&D has fallen over the last fewyears. The recent re-organisation of DTI funding programmes has opened newopportunities for aerospace R&D funding through the Technology Programmes,such as the Collaborative Research & Development grants and Knowledge TransferNetworks programmes. Aerospace companies are also able to benefit from R&D taxcredits. There is, as yet, little evidence as to whether these new funding streams willcompensate the UKAI for the loss of the Civil Aircraft Research and TechnologyDemonstration (CARAD) programme. However, evidence from the distribution oflatest round of Technology Programme funding, where the aerospace industryreceived a quarter of the £60 million, suggests to us that they might. (Paragraph 77)6. We are content that the DTI holds a ‘watching brief’ over the implementation of theNational Aerospace Technology Strategy (NATS) by the Aerospace Technology43

Steering Group (ATSG) and the co-ordination of funding for the NATS by theNational Aerospace Strategy Group (NASG). However, we believe that there is awider public interest which needs to be addressed. We therefore recommend that areport be made to Parliament annually by the Government on the progress that hasbeen made towards the NATS. This should, as a minimum, include a report on thework of the ATSG and the progress that has been made by the NASG. (Paragraph100)7. Aerospace is a technology-intensive industry and the benefits from public sectorinvestment in aerospace R&D are not confined solely to the industry itself. This iswitnessed by the number of ‘technology spill-overs’ into the wider economy, whichhas allowed other sectors, such as the UK motor racing industry, to be world beaters.We recommend that the work of the National Aerospace Strategy Group should beprioritised and the public funding requirements of the NATS be granted so that thevision of the Aerospace Innovation and Growth Team, that the UK will continue tobe recognised as one of the world’s most innovative and productive locations, can berealised. (Paragraph 101)8. The work of the Aerospace Innovation and Growth Team (AeIGT) is a primeexample of what can be achieved for an industry through the willing collaboration ofall of its stakeholders. The UKAI is one of the most important sectors of the UKeconomy and we believe that, through their support for the AeIGT, this has beenrecognised by the Government. (Paragraph 112)9. With a target date of 2022 for the implementation of the recommendations of theAeIGT’s Report on the future of the UKAI, we believe it will be some time before ameaningful assessment of progress towards the vision of the AeIGT can be madewith any degree of confidence. However, the progress which has been reported to ussuggests that a good start has already been made. We have no doubt that oursuccessors will wish to investigate the competitiveness of the UKAI before 2022. Theprogress made towards the AeIGT’s vision, that by 2022 “the UK will offer a globalAerospace Industry the world’s most innovative and productive location, leading tosustainable growth for all its stakeholders”, would doubtless be one of the main areasthat they would wish to review. (Paragraph 113)

The Committee deliberated.Draft Report (UK aerospace industry), proposed by the Chairman, brought up and read.Ordered, That the Chairman’s draft Report be read a second time, paragraph by paragraph.Paragraphs 1 to 113 read and agreed to.Summary read and agreed to.Resolved, That the Report be the Fifteenth Report of the Committee to the House.Ordered, That the Chairman do make the Report to the House.Several papers were ordered to be appended to the Minutes of Evidence.Ordered, That the Appendices to the Minutes of Evidence taken before the Committee bereported to the House.—(The Chairman)